2005 BANKRUPTCY LAW RAISES MORTGAGE FORECLOSURE RATE.

A couple of recent articles in Businessweek.com addressed bankruptcy issues. Bankruptcy is an area of law and economics that the Author finds interesting. Not that the Author would like to try bankruptcy, but the bankruptcy rules sometimes have far-reaching consequences in the American economy. Some intended, some not-so-intended. Some downright negative. And at least one marginally criminal.

We will address one of the articles today, another in a later post.

YOUR HOUSE OR YOUR CREDIT CARDS? (DOESN’T IT SEEM THAT THE AUTHOR ENJOYS PUTTING HARD CHOICES TO HIS READERS, WHILE AVOIDING ANY RESPONSIBILITY FOR HIS OWN CONDUCT?)

Under the bankruptcy scheme prior to 2005, it was relatively straightforward to file Chapter 7 (liquidation) bankruptcy. You filed, stated your debts and assets, and your debts (except taxes, child support and student loans) were discharged (erased). The typical kinds of debts discharged are credit card debt, medical bills, past due rent and unsecured loans. Lower status debts that were not secured by mortgages or other “perfected” security interests (liens).

But if a debtor in Chapter 7 owned a house and was paying on a mortgage (or a car and paying on a loan), the debtor could “affirm” the loan and agree in the bankruptcy court to keep paying on the house or car.

So a lot of Chapter 7 bankruptcies were cases where debtors discharged the debts but kept their homes by reaffirming the mortgage loan.

GOOD POLICY AND GOOD POLITICS.

This scheme reflected a policy choice that debtors should be encouraged to keep their homes or other valuable assets. It also reflected the fact that unsecured credit card type debt created less total economic value and social good than home mortgage loans. (This last point is probably debatable, but is the general economic and political consensus. So how many Libertarians can square dance with angels on the head of pin?)

That scheme held sway until 2005 when the credit card industry rammed through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This law makes it more difficult to discharge unsecured debts. If a debtor makes a certain amount of income, more than the median income in the state in which she lives, she must go into Chapter 13, bankruptcy reorganization.

In reorganization, a debtor is required to repay some of their formerly dischargeable debts over three to five years. Guess what? These debtors, now required to pay for formerly dischargeable credit card debt, may no longer have enough money to pay their mortgages. So rather than reaffirm their home mortgage, they must walk away from the loan and leave the bank to foreclose on their loan and repossess their home.

The debtor becomes a renter or moves in with her sister-in-law, the bank gets a house it doesn’t want, and the credit card companies get a few grams of carrion out of their usurious interest rate loan.

Ah, the Halcyon days of the workhouses and debtors prisons.

AIN’T god BEEN GOOD TO MASTER CARD AND VISA?

The Author does not believe that debtors should abuse the credit system. And high rates of default raise the cost of credit for other borrowers. But not for everyone, necessarily. If you have good credit, your interest rates and loan terms will reflect that credit history. Lenders like you because of your high financial standards. They send you pens and calendars around the HOLIDAY SEASON.

If you have poor credit, you are among the great unwashed (but not unwanted) rabble that gets charged a lot more in interest rates and fees. And when more of your ilk default on your credit card loan, credit card lenders are forced to raise interest rates beyond 21% to 24% and charge more in late fees. Even as their cost of money to loan out falls.

What’s the lesson? If every schlub with poor credit would pay their credit card bills on time, the interest rate on such loans might fall from 24% to 23.9%. And if politicians and mortgage industry lobbyists had foreseen that the 2005 bankruptcy bill, a sop and gift to the credit-card cartel, would exacerbate the mortgage foreclosure crisis, a few more folks might still be in their homes.


PRETTY WOMEN ARE NOT PERMITTED TO WALK WITH GORILLAS IN THE DESERT OF THE REAL!